Rise of Competition Jurisprudence, Coauthred with Mohit Kalawatia, The Pioneer, 01 March 2018

http://www.dailypioneer.com/columnists/oped/regulating-competition-without-stifling-the-nascent-internet-economy-in-india-will-be-a-tough-task-but-the-cci-must-find-ways-to-proactively-engage-with-experts-on-questions-concerning-the-new-economy.html

The increasing prominence of large online businesses has made competing authorities around the world devote more time in the ‘new economy’, characterised by rapid-scale innovation. In this context, the Competition Commission of India’s (CCI) decision in the recently resolved case on Google, throws light on the approach likely to be followed by our anti-trust regulator going forward.

The CCI, in its order dated February 8, 2018,  imposed a Rs 1.3 billion fine on Google for abusing its dominant position in ‘online general web search’, and the ‘online advertising search’ markets.

Special characteristics of the Internet economy, and the methodology to determine the existence of dominant position, are important points of departure before abuse of dominance is established as it was in the Google case.

Many online businesses seem to follow a counter-intuitive business model, and often make big sums of money without selling anything to the retail user; and even though there are fewer barriers to online distribution, then there are offline, such companies can still dominate online markets by capturing consumers within their expansive ecosystems.

Special characteristics: It is said that in the new Internet economy, where many products (and services) are made available for free, consumers are often themselves the product. In this respect, the CCI judgement echoes Prime Minister Narendra Modi’s remark at Davos, that “business models based on collection and processing of data will shape the world”, and it further opines that even though Google provides its search services for free, users offer indirect consideration to the company by allowing it to collect and use their information; consequently facilitating generation of advertising revenues.

The CCI also acknowledges the impact of ‘network effects’ on online businesses. That is, a user’s benefit from a product or service increases with the number of other users within the network — consequently opening new avenues for market dominance. Such effects are particularly important in two-sided markets where users on each side of the market derive benefits from the expansion of users on the other side.

For example, commuters, who use radio-taxi platforms, will be more attracted to a platform which has a larger driver network, and therefore, lower waiting time for users. Specifically,  the CCI points out that anti-trust assessments relying solely on the provision of ‘free’ services to one side of the market, may fail to see the complete picture.

The presence of network casts special responsibility on businesses which have a dominant position in online market. Simultaneously, it is important that the CCI continues to draw a distinction between the inherent nature of competition in a network industry, on account of the structural features of the market in question, and a situation wherein a firm adopts exclusionary practices to abuse its dominant market position.

To be clear, dominance in and of itself is not a sin and is not penalised by any statute, only its abuse is.

Determining abuse: The CCI normally commences its inquiries by delineating a ‘relevant market’. Notably, there has been a dichotomy in CCI’s approach while ascertaining relevant markets in the new economy. For instance, in the context of e-commerce related judgements, the CCI has previously adopted a wide approach and described online and offline markets as constituents of the same market. In contrast, for the Google case, it adopted a narrower approach, distinguishing online and offline markets.

Given that there are often several intersections between online and offline businesses, the CCI may be tempted to maintain such subjectivity going forward. In an ideal world, a clear direction of competition jurisprudence would serve as guidance to market participants.

After delineating a relevant market, the next step to determine abuse involves ascertaining market dominance. In this context, competition law prescribes that the CCI should consider factors like market share, size and resources of the firm in question, size and importance of competitors, vertical integration of the service network and entry barriers. However, in practice, the CCI gives asymmetric importance to market share as an indicator of dominance, as also evidenced by the investigations on Google.

An overall inability to ascertain market structure has served as an analytical limitation to CCI investigations in the past (for instance on predatory pricing). This approach may need some reimaginin  as it fails to take into account that the Internet economy is characterised by short innovation cycles and, therefore, large market shares may often be ephemeral.

 Conversely, aspects such as vertical integration may need more attention, given that dominance is also a function of how ‘fairly’ an online business is able to capture and control its users.

In the age of big data and artificial intelligence, it is reasonable to expect that businesses with large data sets and computing power will integrate with specialised services and create a new paradigm of dominance wherein it would be very hard for new market entrants to ever usurp their edge.

Regulating competition without stifling the nascent Internet economy in India will no doubt be a tightrope walk for the CCI. For instance, an overly narrow approach for determining relevant markets can kill innovation and too wide an approach can stifle competition. Both will have adverse impacts on consumer welfare.

Similarly, vertical integration and provision of bundled or stacked services, already veil real instances of abuse globally.

While jurisprudence from foreign shores can offer some limited insights as a regulator that is central to the sustainable growth of India’s new economy — where politicians tend to look for our economic salvation, the CCI has the opportunity to craft an exceptionally nuanced and transparent approach. Towards this, more market insights and rigorous economic analyses must necessarily accompany our competition jurisprudence.

The CCI must build internal capacity and find ways to proactively and dynamically engage with industry and civil society experts on new questions concerning the new economy.

(Vivan Sharan and Mohit Kalawatia are technology policy experts. Views expressed are personal)